The IRS has issued guidelines clarifying and expanding on coronavirus-related distributions from 401(k)s, IRAs, and other eligible retirement plans.

The CARES Act, signed into law on March 27, provides an estimated $2 trillion in emergency economic relief and stimulus for individuals and businesses. It also allows for qualified individuals to take up to $100,000 in penalty-free distributions from eligible retirement plans, and a three-year reprieve on paying the taxes.

Specifically, Section 2202 of the CARES Act said that qualified individuals could take up to $100,000 out of qualified plans, including 401(k)s, 403(b)s and IRAs, if they or their spouse had contracted Covid-19; if they had been laid off or seen work hours reduced because of the virus; their business had to close; or because a lack of childcare kept them out of work. Individuals could take out the money in aggregate from their plans from January 1 to December 30. While there was no penalty, they have to pay taxes on these distributions ratably over three years.

Additionally, participants may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided they complete the repayment within three years after the date the distribution was received. Repayment will be treated as though it were repaid in a direct trustee-to-trustee transfer so that a participant does not owe federal income tax on the distribution.

But there has been confusion regarding distribution and repayment, as well as who is a qualified individual. That prompted the IRS to issue NOTICE 2020-50, which provides guidance on section 2202 of the CARES Act for qualified individuals and eligible retirement plans.

The expanded IRS guidelines under Notice 2020-50 include a spouse or any member of a household who has been financially affected by Covid-19. The clarifications for a qualified individual are as follows:

• The individual having a reduction in pay (or self-employment income) due to Covid-19 or having a job offer rescinded or start date for a job delayed due to Covid-19;

• The individual’s spouse or a member of the individual’s household  quarantined, furloughed or laid off, or having work hours reduced due to Covid-19, being unable to work due to lack of child care due to Covid-19, having a reduction in pay (or self-employment income) due to Covid-19, or having a job offer rescinded or start date for a job delayed due to Covid-19; or

• Closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to Covid-19.

As it turns out, the clarification by the IRS paints a more appealing picture for those qualified individuals. If they are not impacted by Covid-19, they can still borrow from their retirement savings because as long as a spouse or a member of the household is financially impacted by the coronavirus, they would be eligible for a coronavirus-related distribution.

The IRS Notice 2020-50 also made clear that any distribution received by a qualified individual can be treated as a coronavirus-related distribution, even if the distribution is made from a beneficiary IRA or beneficiary account under an employer-sponsored retirement plan, and the income from such amounts are eligible to be spread ratably over 3-years.

In addition, the new guidelines clarified several other areas on distribution, recontribution and taxes.

But Cathy Clauson, senior vice president for retirement at AssetMark, cautions against jumping at the opportunity to borrow from your retirement savings. While she applauds the government for allowing people to take money out penalty-free and spread the taxes over years, she said it should be a last resort.

“You don’t just do it because you can," she said. "Do it because you have to.”

Clauson noted that the borrowing is meant to be short term, and it should be just that.

"If you have to do it, pay your rent or mortgage and feed your family by all means," she said. "But the minute you don’t need it that way anymore, you should put it back as soon as you can, even if it’s $100 at a time. That’s the only way you are not going to significantly derail your retirement savings and your retirement plan.”